Another year, another Russia shutdown: after two years of brisk flows, capital markets activity came to an abrupt halt in April when the US imposed sanctions on Oleg Deripaska, Viktor Vekselberg and their associated companies.
Eurobond issuance dried up, a clutch of IPOs were postponed and investment bankers covering Russia – a fairly phlegmatic bunch – resigned themselves to a relatively lean summer in the hope that the autumn would bring a resumption of business.
As threats of further sanctions emerged in August, from both the State Department and the US senate, such expectations began to look increasingly optimistic. Nevertheless, as markets reopened in September, bankers were still not despairing of an imminent pick-up in activity.
“There is a lot of pent-up demand from issuers,” says one market participant. “If we could get a bit of clarity on what the scope of any additional sanctions was going to be, or more importantly what it isn’t going to be, then we would see quite a backlog of capital markets activity coming through.”
Most of the interest is centred on equity markets, where primary flows had returned to pre-Crimea levels last year. In the week before the April sanctions were unveiled, no fewer than three Russian firms – online recruiter Headhunter Group, poultry producer Cherkizovo and IT services company IBS – had launched mid-cap IPOs.
All three were postponed after the US announcement, but bankers said a number of other listings were in the pipeline, including several larger deals. Indeed, as late as July, reports emerged that petrochemicals giant Sibur was pushing ahead with plans for an IPO that could raise as much as $2.5 billion.
Enthusiasm for IPOs is said to be particularly high in Russia due to the shortage of other exit options for shareholders. “M&A has much less importance for business owners here than in other countries,” says a Moscow-based investment banker.
“Global private equity firms don’t operate here, their local counterparts have very limited capital, international strategic activity is very weak and there aren’t many domestic consolidators. This means often the only way to exit is via the capital markets.”
If ECM activity does resume, market participants will be watching closely to see who wins the mandates. Since April, there have been reports – not necessarily from disinterested sources – of US banks cutting off Russian clients and vice versa.
If and when companies are sanctioned, we will work out what we can and can’t do with them, but there’s no point in making a decision when nothing has happened yet- Senior banker
This is vehemently denied by a senior banker at a US house active in Russia. “It’s simply not true,” he insists. “There is a high degree of caution towards Russian clients, but that is in the context of the overall sanctions environment since 2014. It has nothing to do with the targeted sanctions introduced in April.”
As to the risk of more oligarchs being targeted by sanctions, he says the bank had no plans to pre-empt official announcements. “We’ve had situations where there have been rumours in the market about individuals or entities being put on the list and clients have asked us if we will back out of discussions,” he says.
“Our reply has been that if and when companies are sanctioned we will work out what we can and can’t do with them, but there’s no point in making a decision when nothing has happened yet.”
His statement is corroborated by the choice of Goldman Sachs and JP Morgan to lead Sibur’s IPO, as well as by an independent market source. “The big international banks are still focusing on the same clients as three or four years ago,” the source says. “The same bankers are turning up in the same meetings.”
If anything, locals say US investment banks have been adding new clients in Russia as other western groups have retreated from the market.
While European banks with a big commercial presence in Russia – such as Société Générale and UniCredit – are still regulars on Eurobond issues, ECM activity over the past couple of years has been dominated by the likes of Goldman Sachs, JPMorgan and Morgan Stanley.
Bankers say part of the pullback has been due to sanctions, which European groups are reported to be more wary of than their US rivals, but note that the most high-profile departures from Moscow –Deutsche Bank and Barclays – have been driven by strategic shifts or other unrelated issues.
What has changed in recent years, at US and European houses alike, is the number and nationality of investment bankers based in Moscow.
Again, however, market participants say a general shrinkage of local teams has less to do with sanctions – except insofar as they have affected business volumes – than with a wider trend for concentrating expertise in regional hubs.
“The days of having product bankers in every city are over, but that is all part of trying to manage your cost base as a bank post-financial crisis,” says a Russia-focused banker. “It makes much more sense to put your product and industry specialists in one place and have relationship bankers on the ground.”
Similarly, the replacement of the westerners who staffed investment banking desks in Moscow with locals is seen as part of a natural process. “In the early days, outsiders were seen by parent groups in New York or London – rightly or wrongly – as a safer pair of hands, plus they catered to the traditional Russian admiration for foreigners,” says a Moscow-based banker.
“Over time, however, it became clear that in Russia, as everywhere, long-term relationship banking is better done by locals. They also have the advantage of being cheaper than pure expats and having a higher risk-tolerance threshold.”